William Brent Turner - President Joey A. Jacobs - Chairman and Chief Executive Officer David M. Duckworth - Chief Financial Officer, Chief Accounting Officer and Controller.

Phillip Kim - BofA Merrill Lynch, Research Division Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division Paula Torch - Avondale Partners, LLC, Research Division Charles Haff - Craig-Hallum Capital Group LLC, Research Division Ryan K.

Halsted - Wells Fargo Securities, LLC, Research Division Dana Hambly - Stephens Inc., Research Division Dana Syrune Nentin - Deutsche Bank AG, Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division.

Today's call is being recorded today, April 30, 2014..

Good morning. I'm Brent Turner, President of Acadia Healthcare, and I'd like to welcome you to our first quarter 2014 conference call.

To the extent any non-GAAP financial measure is discussed in today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by following the Investor Relations link to Press Releases and viewing yesterday's news release.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Acadia's expected quarterly and annual financial performance for 2014 and beyond.

For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements.

You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Acadia's filings with the Securities and Exchange Commission and in the company's first quarter news release, and consequently, actual operations and results may differ materially from the result discussed in the forward-looking statements.

The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. At this time for opening remarks, I'd now turn the conference over to our Chairman and Chief Executive Officer, Joey Jacobs..

Good morning, and welcome to our first quarter call. In addition to Brent, I'm here today with our Chief Financial Officer, David Duckworth, and other members of our executive management team. Dave and I each have some brief remarks about the first quarter and our outlook for Acadia. Then we'll open the line for your questions.

We've got off to a strong start for 2014 with our first quarter results. Revenue growth of 25% for the quarter from the first quarter of 2013 produced expanded profit margin and drove a 33% increase in adjusted income from continuing operations per diluted share.

Our revenue growth, again, primarily reflected the addition of new licensed beds to our operations, which totaled approximately 800 for the 12-month ending March 31. We had nearly 500 beds through acquisitions during this 12-month period and approximately 300 through organic growth.

During the first quarter of 2014, we added 122 beds organically, and we completed the acquisition of a 68-bed facility in Riverside, California.

As I mentioned on our previous call, we expect -- we experienced some expected earnings drag in the first quarter related to the ramp up at de novo facilities opened in the fourth quarter, as well as the conversion for the Cascade facility from its previous status as a not-for-profit provider.

These facilities cost us about $0.02 per diluted share for the first quarter. Our revenue growth for the first quarter reflected 9.9% growth in same-facility revenue versus the first quarter last year. Patient days increased 7.4% and revenue per patient day rose 2.3%.

These increases were primarily due to the new beds added to the same facility base since the first quarter last year and included 108 beds added to the base during the first quarter of 2014. The company same-facility EBITDA margin increased to 26% for the first quarter of 2014, up 290 basis points from the first quarter of 2013.

Consistent with our long-term performance, this expansion is primarily the result of greater revenue-driven operating leverage. The growth in same-facility EBITDA contributed to a 29% increase in consolidated adjusted EBITDA.

As we look forward to the rest of the year, we continue to see opportunities for growth organically as reflected in our plans to now add close to 350 beds to existing facilities during 2014. In addition, our top line of potential facility acquisitions remains very active, although the impact of any future acquisitions is not included in our guidance.

We also remain confident of our ability to produce further long-term growth in earnings and shareholder value. There is growing demand for high-quality inpatient behavioral care, and Acadia is the leading pure play public provider.

With a proven business model, highly experienced management team and continuing access to capital, we expect to continue increasing our market share in a highly fragmented industry. Thank you, and now here's David Duckworth to discuss our results in greater detail..

Thanks, Joey, and good morning. Acadia's revenue for the first quarter of 2014 was $201.4 million, a 24.9% increase from $161.2 million for the first quarter of 2013. Our adjusted income from continuing operations increased 32.5% to $14 million from $10.6 million.

On a per diluted share basis, adjusted income from continuing operations grew 33.3% to $0.28 for the first quarter of 2014 from $0.21, the first quarter last year.

Our adjusted results exclude transaction-related expenses of $1.6 million for the first quarter this year and $1.5 million for the first quarter of 2013, as well as debt extinguishment cost of $9.4 million for the first quarter last year.

As Joey mentioned, same-facility revenues increased 9.9% for the first quarter, with a 7.4% increase in patient days and a 2.3% increase in revenue per patient day. Same-facility EBITDA margin increased 290 basis points to 26% of the same-facility revenue for the first quarter of 2014 compared with 23.1% for the same quarter last year.

Adjusted consolidated EBITDA increased 28.6% to $39.3 million, which was 19.5% of revenue versus $30.5 million, which was 18.9% of revenue for the first quarter of 2013. Acadia's tax rate for the first quarter of 2014 improved 240 basis points to 37.4% compared with 39.8% for the first quarter last year.

For 2014, we continue to expect that our tax rate will be approximately 38%. As detailed in our news release, we affirm our 2014 guidance for adjusted earnings per diluted share in a range of $1.26 to $1.29. Our financial guidance excludes the impact from any future acquisitions and transaction-related expenses.

This concludes our prepared remarks this morning, and thank you for being with us. I'll now ask Alicia to open the floor for your questions..

[Operator Instructions] We'll go first to Kevin Fischbeck of Bank of America Merrill Lynch..

First, did weather have an impact on the quarter?.

It was a -- we did have a little impact. It was mainly in the states of Arkansas and Louisiana but we didn't actually spend any time trying to quantify it. But they did have some weather impacting their results..

Got it.

And so from like a base-point perspective, no real analysis was done there?.

No..

And my second question, do you guys see any signs of reform in the quarter?.

It's still too early for us to see. Our payer mix, basically, was unchanged from our year-end payer mix that we experienced in 2013. There was some slight movement there but nothing that we directly relate back to the Affordable Care Act..

And we'll go next to Whit Mayo of Robert Baird..

Can you remind us where you are in terms of obtaining Medicare certification on the recent de novos? And perhaps, just comment on the pace and timing of the start-up of losses and when you think you can pick back up the $0.02 that was a drag in Q1?.

Okay. We're missing 1 number, oh, actually 2, we're missing 2 numbers. One is just a change of ownership in California that we'll be getting for our facility that we bought the first of the year, and we expect that to happen anytime soon. And we're real close to having our number for Seattle.

The other 2 facilities, we have our numbers there and they're fully operational. All 3 of the de novo facilities that I talked about, monthly, they had an improvement from the previous month. So in the second quarter, we expect that to continue. And by the third quarter, hopefully, the drag will be gone and they will be on their budgets..

Okay, so we should still think about it being a modest drag in 2Q and then breakeven in 3Q? Is that correct?.

Correct..

Okay, got it. That's helpful.

Maybe just some color on the $16 million in real estate spend in the quarter, is that a new market or this -- is this an old market?.

That's a good catch there. We spent $10 million. We bought a former charter facility in the state of Texas, a 108-bed facility that was being used to -- more for an adult residential facility and they are moving out. And we're going to rehab the facility and bring back 108-bed acute hospital for the $10 million that we spent there.

That should open sometime mid next year. And then we spent some more money, I think $3 million to $4 million in Las Vegas. Even though we opened up 36 beds there in the last 60 days, we probably need to expand it again at the end of 2015. So we acquired some land next to the facility and probably expanding that facility again next year.

And this will be its third expansion since our ownership, I think. So that's where the real estate spend was at in the first quarter..

Got it. And I'm going to slide just one quick one in for David.

If you just remind us on revolver availability, letters of credit and any call opportunities on your bonds over the next year or so?.

There's still some time before we're -- we'll look at the bond redemption opportunities, at least to avoid what we think is a more expensive premium. But on the revolver, we had $204 million that's available, actually, $206 million at the end of the quarter..

And we'll go next to Paula Torch of Avondale Partners..

So if we think about your growth strategies, as being a combination of de novos, acquisitions and new-bed expansions, I guess I'm curious as to where you think your biggest opportunity lies in the next couple of years and where you're going to be putting most of the focus? And as a follow-up, has the M&A landscape changed at all in terms of the pipeline and visibility for you?.

We've already beginning our lists for expansions for 2015 and we've already reached 200 -- over 350 beds that we'll be building next year to our facilities..

We'll go next to Charles Haff of Craig-Hallum..

On the bad debt side, 2.3% of revenues, that came in a little bit better than you've been trending the last 3 quarters. I'm wondering if something happened this quarter.

Or if this level is sustainable and what your outlook is for doubtful accounts?.

We did see, Charles, a 40-basis-point improvement over the first quarter last year. This is really a lot of the collection policies and other initiatives we've been working on over the last year, taking effect and driving some improvement on that line. Our outlook is still that it's going to be in that 2.5% to 3% range.

But we did see some improvement that we hope can continue going forward..

Okay, great. And then on the Las Vegas land purchase, that's a pretty sizable chunk of land relative to your existing facility that's next door.

What do you think the capacity could be ultimately for that plot of land? How big could that facility grow to?.

The facility -- if Las Vegas keeps growing and the growth there is coming back, it could be 150, 200-bed facility..

We'll go next to Gary Lieberman of Wells Fargo..

Halsted on for Gary.

My question is on the drop in the length of stay, if there's any color you can provide on that? I think in the past, you've talked about they're really being nothing in particular you'd point to, but I was wondering if that changed?.

We can give you a little bit more of definitive answer there. It's actually just the mix of acute versus RTC patients in the first quarter this year. I think 53% of our patients days came from acute and the 47 -- excuse me, I mean 50% came -- oh no, that's not right.

I'm sorry, it's 53% of our patient days -- this is for all of us, 53% of our patient days were acute. The previous year it was 50%, so we're seeing an increase in acute. And that's where we've been building most of our beds, are on the acute side so it's just -- there's no pressure on length of stay from utilization review, that sort of stuff.

It's just that we have more acute patient days versus the length of stay -- versus the RTC patients..

Okay.

And I have you been, I guess, in contact with any agencies or any other payers that have maybe mentioned any sort of potential reduction in what they’re going to permit for their beneficiaries?.

No, no, we've had any -- we've not had any meaningful discussions with any of our payers about their concern about inappropriate length of stay or the length of stay needs to come down. The length of stay on the acute patients for the industry has been approximately 9.5 days for 15 years, and it's staying that.

And then on the RTC side, fortunately for us, we have specialized, and taken care of very difficult patients in our RTC facilities. And our national marketing group, there's a lot of needs for those. And the state that refer to us, wants their patients to get well so they're not trying to shorten the length of stay or put pressure on that.

But they more -- they care more about making sure the patient improves, so that's what we're about. And the drop -- and the small drop in the length of stay was just the mix of acute days versus RTC days..

Okay. Then maybe last one, any sort of updated thoughts? We're expecting the PPS rollout maybe, I assume potentially today.

Any sort of views on that?.

Sure, Ryan. This is Brent Turner. We are expecting to see a rule update here at sometime today. Everything that we have heard from multiple industry thought leaders is it's very minimal tweaking of some of the provisions around PPS rate.

I think just looking back, the prospective payment rate have changed for Medicare and patient psych was one of the most successful rate changes that the government ever implemented, 3% cost increase over the four-year implementation period of that.

So when you look at that and combined it with the demographic continuing growth in needs for the Medicare beneficiaries, we just don't see a significant change anywhere in that rule. And like I said, that's validated by some of our industry guidance as well.

But we'll wait and we'll be available to address any of the comments or questions that come from the actual rules when we see them..

We'll go next to Dana Hambly of Stephens..

Joey, just to clarify on the bed adds, I was a little confused.

It was -- so we were at 300 for this year; it's now 350 for 2014 and you're already planning 350 for 2015, is that right?.

That is correct. Actually it's 356 for 2015..

356. Okay, perfect. And then getting back to the cash flow statement, I think you said last quarter, we should think about kind of $20 million to $25 million in cash flow from ops. Is that still a good number? I know -- I think the first quarter tends to be a little bit lower..

the bonus payouts for performance across the entire company that have been accrued up until that point, and then also, a large semiannual interest payment on our notes occurring in the first quarter. So I think on average, that statement we made is going -- is applicable.

But the first quarter is sort of the weakest from a cash flow from ops standpoint..

Okay, that's helpful. And just on the CapEx, looks a little bit higher. I just want to make sure -- I mean, routine CapEx, is that still kind of running 2% to 3%.

And then kind of what are your growth CapEx initiatives for the year?.

Yes, on the maintenance CapEx, it does still run in that range. It was 2.2% for the quarter or $4.3 million, and the remainder, of course, related to our expansion projects, Dana..

Okay, and so the expansion falls in that -- the CapEx?.

It does..

We'll go next to Charles Haff of Craig-Hallum..

I wanted to ask you about the pricing outlook.

Has there been any changes? Commercial, you're still expecting kind of a 4% to 6% pricing growth; Medicare, Medicaid, kind of 1% to 2%?.

That is correct..

We'll go next to Darren Lehrich of Deutsche Bank..

It's Dana Nentin in for Darren.

Just to follow up on the question about capital structure, what sort of right mix of that to equity for you guys? And where are you with your target leverage ratio?.

Sure, Dana. We -- ended the quarter, at about 58% debt-to-cap, and just over 4x debt-to-EBITDA from a leverage standpoint. This -- our business is very -- we can leverage the cash flows, the minimal ongoing CapEx.

We have comfort well up to 5 and above, if necessary, but we've been disciplined around keeping the leverage at about 4x in order to be responsive and reactive to acquisition opportunities. So it's very much a moving target but with the right transaction, the right impact on returns and accretion, we could see the leverage going up.

But at the same time, we've got the ability to continue to generate the cash flows and continue to pay down debt, going forward. But we don't see the leverage going much below where we are now and have opportunities to put the revolver to use and increase it, and then continue to keep the balance sheet positioned for growth..

Okay, great. And then just one quick housekeeping item.

Can you give us the number of same-store facilities and beds at the end of the quarter, and total beds as well?.

Sure. The number of same facilities out of our 52 is 44 facilities. And then there's 3,700 beds in that group out of our 4,300 beds..

We'll go next to Chris Rigg of Susquehanna International Group..

And I apologize, I got in a little bit late here. And I understand the comments about the mix shift on the length of stay, but as there been any change in sort of the core length of stay? It's obviously hard to determine given the bed shift.

Particularly in the acute side, it's been pretty stable?.

Yes, it's been stable..

Okay.

And then just on the M&A front, has there been any change in sort of the competitive dynamic? I understand the SKU but just in terms of pricing of deals or where you're seeing sort of transaction activity, can you just give us a sense for how that may have changed in recent months?.

It hasn't changed in recent months, and it's -- the competitiveness of acquisitions is, I think, consistent through the 3-plus years that we've been with Acadia. So sometimes some people show up, sometimes they don't, sometimes there's 1 or 2 others looking but it's -- so many times it's not.

So I think it's pretty consistent over the past 3 years, the competitiveness for the acquisitions..

At this time, we have no further questions. I would like to turn the call back over to Mr. Jacobs for any additional or closing comments..

Thank you. Once again, thank you for listening in for our first quarter. We're off to a great start. I do want to thank Ron Fincher and his operations team, the same-store numbers and the margins improvements that we have seen to this press release and expect to continue through the year.

Ron and his group are outstanding, and very appreciative of their hard efforts. And we have a great team here at Acadia, and once again, thanks for being with us on the call, and we'll talk to you again at the end of the second quarter..

That does conclude today's conference. We thank you for your participation..